Clinton Said to Accept Capital Gains Tax Cut

President Clinton has privately told Republican congressional leaders that he is willing to agree to a reduction in the capital gains tax as part of the “horse-trading” necessary to reach a budget compromise, White House sources said Tuesday.

Although Clinton has indicated before that he might consider some sort of reduction in the tax, his comments to GOP leaders mark the first time he has offered to support a reduction as part of a budget compromise.

“It’s an element that the Republicans are insisting upon in the revenue part of a balanced budget and the president will try to get something in exchange for agreeing to it,” said a senior administration official.

Sen. Trent Lott (R-Miss.), deputy to Senate Majority Leader Bob Dole (R-Kan.), said in an interview Tuesday that Clinton told him in two telephone conversations that he would favor a reduction in the capital gains tax if other tax and spending issues could be resolved.

Lott has developed into a key negotiator in the prolonged partisan budget battle and his comments carry special weight at the White House because he is a close associate of Dick Morris, Clinton’s chief reelection campaign advisor. Morris was on Lott’s Senate campaign staff in 1988 and also advised him on his reelection campaign in 1994. A White House official suggested that it was at Morris’ urging that Clinton telephoned Lott.

Last week, in a speech to the Biloxi Chamber of Commerce, Lott predicted that Republicans and Clinton would “split the difference” on Medicare spending and resolve the federal budget deadlock relatively soon.

Lott’s comments “were read very closely at the White House because he’s a big pal of Dick Morris,” said a senior Clinton official.

However, White House officials apparently do not share Lott’s optimism about an agreement on reductions in Medicare growth--or about an impending resolution of the budget impasse.

“My read is that there may be a lot of give on other parts of the budget, but the president can’t afford much give on Medicare unless he wants to get shellacked in the election this year,” said the senior official.

As for restraining Medicaid spending, the official said, “it would be even harder to agree to cuts because Medicaid goes to the heart of the vulnerabilities of the poorer population. This is less a dollar issue and more a principle of guaranteed health care.”

Mike McCurry, Clinton’s press spokesman, declined to comment on Lott’s statements about Clinton’s position on the capital gains tax, but indicated the president has made it clear he still opposes the current GOP proposal of reducing the top tax rate on profits of stocks, bonds, real estate and other investments from 28% to 19.8%.

Clinton, McCurry said, “doesn’t have any philosophical objection to cutting the capital gains tax if you target it on investments and start-up companies so that economic benefits flow principally to new business so that it becomes job creation.”

White House officials suggested that Clinton, in return for agreeing to support a cut of some kind in the tax, “will try to get something in exchange for it,” such as an agreement that the GOP would delete from its tax package a proposal to make deep cuts in the earned income tax credit for low-income working people.

Although the program was initiated by Republicans and has enjoyed strong bipartisan support, Republicans charge that it has become rife with fraud and abuse and that it has spiraled out of control. They would tighten the program at an estimated savings of $32 billion. Clinton would leave eligibility for the program essentially untouched, but would beef up enforcement against fraud and abuse to save a projected $3 billion.

Lott said the program “started off at $5 billion and exploded to $46 billion. It has been expanded to cover people earning $30,000 a year. Do you know how many people in Mississippi alone make $30,000 a year? It wasn’t a program intended to be for middle-income people.”

Despite the lack of optimism expressed Tuesday by the White House over the budget negotiations, Lott said, “I still think a deal is possible. There’s about a $35-billion difference between the two sides in a budget spread over seven years. I can’t figure out why we can’t close the gap.”

Lott, contacted by telephone Tuesday in Mississippi, said Dole had called him earlier in the day, asking him to return to Washington to help with budget negotiations and to “check the temperature around the country.” He immediately scheduled a flight to return to the capital this morning.

In the interview and in his Biloxi remarks, Lott said that of the 15 people at the White House working on budget negotiations, “there are only two who are really in favor of cutting the capital gains tax and getting a budget deal--the president and Dick Morris.” He said Leon E. Panetta, Clinton’s chief of staff, and George Stephanopoulis, a senior advisor, “and the rest of them are all opposed to it--but there’s only one who counts.”

McCurry countered that White House staff members are united in wanting to reach a budget agreement. “George and Leon want a deal, but they don’t want a bad one,” he said.

Lott suggested that no “real progress” on the budget will be made until the negotiations are narrowed to about six officials--Clinton, two top White House aides, and three GOP congressional leaders.

While the two top Republican negotiators, Dole and House Speaker Newt Gingrich (R-Ga.), may try to compromise with Clinton, Lott said, they face restraints from some of the more conservative Republicans who, among other things, are insisting on deep cuts in the rates of increase in Medicare and Medicaid spending.

“Gingrich is on a short leash and can go only so far,” Lott said. “And Bob Dole, in case he doesn’t know it, is on a short leash too, and if he goes too far he’ll get in hot water.”

Lott, who is expected to be elected Senate majority leader if Dole cinches the GOP presidential nomination and vacates the post, said Dole “wasn’t happy” at first about his election last year as his top deputy. Dole had supported keeping Sen. Alan K. Simpson (R-Wyo.) as the Republican whip, his chief deputy, but Lott defeated Simpson in a hotly contested race.

“There was a need for a more aggressive leader,” Lott said, “and I believe that Dole now believes my election was the right thing. We have a good working relationship.”

He suggested that Dole, if he locks up the nomination early, should relinquish the leader’s job sooner rather than later and said Dole probably will step aside as majority leader as early as April if he has cinched the nomination by then.

“Frankly,” Lott said, “I didn’t think it would work for him to run for president and remain Senate majority leader, but he’s done an excellent job of juggling it. He has incredible stamina.”